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China's fury at Bank of Japan 'blackmail' makes zero sense

Outrage over Japan's efforts to kick-start its moribund economy gives lie to Beijing's insistence that it doesn't undervalue its own currency

Tom Holland

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.

According to the story on the front page of Saturday's South China Morning Post a host of mainland economic bigwigs led by former People's Bank of China monetary policy committee member Li Daokui are "livid" at what they see as the BoJ's efforts to devalue the yen.

One disgruntled economist even accused the BoJ of "monetary blackmail" and called on the Chinese authorities to retaliate in kind.

No doubt there are lots of things an intelligent person could legitimately get furious about these days - pollution, injustice, the abuse of power - but, really, the Bank of Japan's monetary policy isn't one of them.

What's upset China's economic pundits is last week's announcement by new BoJ boss Haruhiko Kuroda that he intends to hit his inflation target of 2 per cent within the next two years.

And to achieve that target - no mean feat in an economy that has been locked in deflation for the past four years - he plans to print enough money to double the size of Japan's monetary base by the end of 2014.

Chinese economists regard this policy as a devious attempt to drive down the value of the yen, and so boost the commercial competitiveness of Japanese exporters compared with their rivals in China.

At first glance it looks as if they might have a point. As Tokyo has intensified its fight against deflation over the past six months, the yen has fallen by 20 per cent against China's yuan.

Now, following last week's announcement, foreign exchange analysts believe the Japanese currency could easily fall by another 5 per cent.

But look more closely, and it becomes clear that the BoJ is not so much guilty of monetary blackmail against China, but of stealing Beijing's clothes.

After all, for much of this century Beijing itself pursued a policy of deliberately undervaluing the yuan to provide an effective subsidy to China's export industries.

As a result, in the 15 years since the Asian crisis, the yuan has appreciated just 18 per cent against a basket comprising the currencies of China's main trading partners.

In contrast, as the first chart shows, up until September last year, the yen had strengthened by 45 per cent. The recent fall in the Japanese currency simply brings the two back into line.

However, when you consider that over the last 15 years the Chinese economy has expanded by 300 per cent in real terms, while Japan has grown just 9 per cent, it is likely the yen has a lot further to fall before it is fairly valued against the yuan.

In any case, although Chinese economists are focused on the yen, the BoJ's objective is not to devalue the yen, but to reflate Japan's domestic economy.

And in aiming for a 2 per cent inflation target, the BoJ is merely falling into line with other leading central banks, including the Bank of England and the European Central Bank, which are also aggressively pursuing a 2 per cent rate of inflation.

Until now, the BoJ's efforts have looked somewhat half-hearted. Although the Japanese central bank has been printing money by buying government bonds for the past 10 years, its purchases have been modest.

Since 2002, the BoJ's assets have grown from 25 per cent of Japan's gross domestic product to 33 per cent. As the second chart shows, over the same period, the Chinese central bank's balance sheet has ballooned from 43 per cent to 57 per cent of China's GDP.

In short, Japan is doing what China has already done, albeit using different methods.

Instead of complaining about monetary blackmail, Chinese economists should be cheering Kuroda and the BoJ along in their attempt to reflate Japan's economy.

A recovery in its second-largest export market would only be good news for China. It's nothing to be furious about.

I find the assertions of this article farcical, maybe even a bit cynical. In my opinion the writer employs the typical kind of rhetoric and one-sided reporting used for political spin. The misconception starts with the headline, which in usual fashion, attributes the opinions of a few individuals, in this case some Chinese economists to represent all of China, as if the opinions of some members of the Tea Party should represent all of the United States, or the opinions of a few individuals in the Labour party should stand for all of England. In reality, the event that occurred today which actually represents China's national monetary policy is this: "China's yuan closed little changed on Tuesday after the central bank set its daily midpoint virtually flat, strengthening expectations that authorities will not guide the currency sharply weaker in response to monetary easing by Japan." {Reuters}The writer also asserts"...the BoJ's objective is not to devalue the yen, but to reflate Japan's domestic economy."This is pure semantics, the writer uses the currently fashionable term for currency devaluation, "reflate", but even Shinzo Abe is not trying to conceal this fact, his own public and well documented campaign platform included a specific call for a weaker yen to bolster exports.The writer wants to rationalize a double standard without calling it a double standard, but that is exactly what this is.

for whom the be... Apr 8th 20139:59pm

The writer has rightly pointed out the imminent economists in Mainland China should not be furious upon the devaluation of Japanese yen since Japan is its second-largest exporter.And they, as intelligent people, should intstead, be furious against serious pollution (not American conspiracy of course) across the country; the rampant courruption and abuse of power among different levels of the cadres; injustice existing in the society (where the rich or powerful bully/harass the ordinary citizens has become a norm) and the judicial system which is controlled by that Party which would never allow a division of power among executive,legislative and judicial departments.Reminbi has appreciated by 18 percent in the past 15 years while its economy has risen by 300 % while Japanese yen has appreciated by 45 % with its economy risen by 9% only compared with 1997 after the Asian financial crisis.Is it fair to Japan by accusing Bank of Japan as a blackmailer ? This uncivilized nation happens to be my mother country and many Hongkongers' maybe the our biggest misfortuen indeed !

pharding81 Apr 8th 201311:00am

David Li Daokui has never been one for objective thinking when it comes to China

whymak Apr 8th 20136:22am

You're right. I think Chinese economists are wrong about this one.
US, UK, and now Japan, are all feverishly trying to re-inflate their economies from the 2008 meltdown. Some Chinese officials have a knee-jerk reaction to beggar-thy-neighbor competitive devaluation, which is really not the intent of these countries.
However, China has a legitimate concern that her huge savings might take a hit if these foreign central banks are printing too much money. I am surprised you didn't mention this one.
Comparing the increases in monetary base between China and Japan is disingenuous without reminding your readers the huge discrepancies in their growth rates in additional to the different velocities of yuan and yen in the quantity equation.
But inflating the size of central bank portfolio may have little effect if the economic problems in these countries are structural. The Fed's monetary base is now almost 350% that in 2008, yet the workforce participation -- a better indication than unemployment for state of the economy -- has fallen to as low as it was in 1979.
BoJ doubling its monetary base will unlikely lift the nation out of the liquidity trap doldrums. In addition to structural issues in its service industries, which are highly inefficient, demographics is actually Japan's biggest problem.
Yes, an improved Japanese economy is good for everyone.
One more thing, the increase in monetary aggregates is not proportional to that of monetary base.